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Sunday, February 02, 2003

Balloon Goes Up on Euro in German Election Results

This is not a good night for German Chancellor Gerhard Schroeder, it is not a good night for Germany, and it is not a good night for the Euro. I say this without any partisan feeling over the outcome of the elections in Hesse and Lower Saxony. What seems to me to be evident above all else in these results - which are in one case the worst for the SPD in local elections since 1945 - is that Germany politics is paying the price for carrying the Euro load. At a time when the dictates of national economic policy would lead to an entirely different monetary and fiscal policy, the weight of the (German imposed) stability pact and the need to contain collective inflation is sending the German economy roaring towards its second recssion in as many years, destination who knows where. This must logically alarm German voters of whatever persuasion, voters who are not exactly renowned for their willingness to take daring risks where the chances of success are slim. Many observers try to look on the bright side and stress that the reform agenda will now be broadened. I fear the contrary. I fear that this could all bode exceedingly badly for the mid-term outlook on the Euro. Remember the Euro is largely a political initiative, and if the initiative breaks down, then the unthinkable is no longer so unthinkable.

German Chancellor Gerhard Schroeder's Social Democrats suffered crushing defeats in two state elections Sunday as voters vented their anger at high unemployment, tax hikes and near-recession, polls showed. Not even Schroeder's opposition to a possible Iraq war, which has left him isolated abroad but popular in war-weary Germany, was enough to offset public disgruntlement over the economy four months after he was re-elected.The SPD suffered its worst results since 1945 in Schroeder's home state of Lower Saxony and in Hesse, television projections showed after polling booths closed. Losing Lower Saxony makes it impossible for the SPD to circumvent the opposition conservatives Christian Democrats' majority in the Bundesrat upper house of parliament, and will force Schroeder to cooperate with them to get laws passed.

Ten million people were eligible to vote in the two states, the first test of sentiment since the September ballot. One projection by the Infratest polling institute on ARD television showed the Christian Democrats (CDU) surged to 48.3 percent in Lower Saxony from 35.9 percent in the last election in 1998, with the SPD crashing 15 points to 33.0 percent. In the central state of Hesse, the CDU held on to power with an increased majority, scoring an absolute majority of 50.1 percent, up from 43.4 percent in the last election in 1999. The SPD plunged to 27.7 percent from 39.4 percent, the poll showed. Schroeder's popularity has plummeted since he was re-elected on a wave of support for his anti-war stance on Iraq and his strong handling of devastating summer floods.

Influential news magazine Der Spiegel ran a picture of a grim-looking Schroeder headlined "The Lonely Chancellor," speculating that defeat will weaken his standing in the SPD. He has tried again to tap anti-war sentiment, ruling out a German "Yes" to war in any U.N. Security Council vote. Germany currently sits on the Security Council. But polls show his Iraq policy has not eclipsed concern about economic woes. Businesses and financial markets hope defeats in the two states will speed reform by strengthening the conservative opposition and persuading Berlin to become more aggressive in cutting welfare costs choking the economy. "I'm optimistic. When the election campaigns are over, the government will put its foot on the accelerator and the opposition will cooperate," the head of the Federation of German Industry, Michael Rogowski, told Welt am Sonntag newspaper. The stock market could also benefit. "New political impetus would definitely help share prices," Hans-Joachim Koenig, fund manager at Union Investment, told Die Welt newspaper.Schroeder has ruled out resigning but poor results are certain to hurt him and make it harder to get laws passed without backing from the Christian Democrats. Political analysts say defeat could silence the SPD's left wing, which has opposed moves by Economy Minister Wolfgang Clement to deregulate the labor market. Losses could also underline the perception that, without radical cuts to the cost-laden social system which has made jobs too expensive for many companies, the government would fail to cut unemployment and lose power in the next general election.January unemployment data due Wednesday are expected to show a rise to 4.55 million on an unadjusted basis, the highest level for that month in five years.
Source: Reuters News
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About

Edward 'the bonobo' is a Catalan economist of British extraction based in Barcelona. By inclination he is a macro economist, but his obsession with trying to understand the economic impact of demographic changes has often taken him far from home, off and away from the more tranquil and placid pastures of the dismal science, into the bracken and thicket of demography, anthropology, biology, sociology and systems theory. All of which has lead him to ask himself whether Thomas Wolfe was not in fact right when he asserted that the fact of the matter is "you can never go home again".

He is currently working on a book with the provisional working title "Population, the Ultimate Non-renewable Resource".

Apart from his participation in A Fistful of Euros, Edward also writes regularly for the demography blog Demography Matters. He also contributes to the Indian Economy blog . His personal weblog is Bonobo Land . Edward's website can be found at EdwardHugh.net.